Getting funding is a challenge, even when there isn’t a pandemic devastating economies. In episode 4 of Small Business Conversations, Finfind CEO and founder Darlene Menzies discusses what funders are looking for in small businesses and different funds available.
MELITTA NGALONKULU: Finfind is an online platform that automatically matches business finance seekers with [suitable] funders from a comprehensive … database of more than 600 SME finance offerings, from public and private sector funders in South Africa. Darlene, it’s a pleasure to have you join us.
DARLENE MENZIES: Hi, Melitta. Lovely to be with you.
MELITTA NGALONKULU: What are some of the current funding challenges faced by small business owners?
DARLENE MENZIES: Melitta, at this time of obviously the lockdown with the restrictions due to Covid-19, there are basically two groups of businesses we’ll be talking about. One is the essential services that have been able to trade right through lockdown into Level 5 and 4; and then those that are more non-essential, and those that either haven’t opened yet or were only able to start trading again during Levels 3 and 4.
So, in the first group, the essential services, those are people that have been turning over a revenue throughout this time. And the challenges that they have are very different from [those of] the other group, which we’ll go to now.
This group really is looking probably for more expansion finance or working capital, because they are wanting to either produce more goods in the food industry, or they’re wanting to make more masks or more medical equipment requirements. And so, they’re looking to lenders right now for that type of finance. And, while there is money available and money has been set aside, there are certain things that they need to do, such as getting their documentation ready, having cashflow forecasts and contracts in place. And so those are some of their challenges. But obviously that’s not really the group that we need to focus too much on.
Businesses that have reached their ‘cash cliff’
DARLENE MENZIES: The group of businesses – and they are many hundreds of thousands of them – are those that have not been able to trade up until now, or only started trading sort of in the last month or two. The problem with those is we’ve gone through three month-ends. We went into lockdown on March 27. There was a March month-end, then April and then May, and we are in June at the moment. Many of those businesses have already reached their cash cliff, which means that they’ve eaten through any money set aside that they had, business has slowed down, they haven’t had revenue. And so, they are sitting in a bad situation right now.
The difficulty with that obviously is that the average or standard lender that would normally extend money to them is now looking for cashflow forecasts to understand when their revenue is going to start again. And one of the biggest problems for those businesses is that they don’t have tax clearances.
Many weren’t able to pay their PAYE or their VAT over these three months because they chose possibly to pay their staff first, so that they could make sure their business kept running.
Without tax clearances you can’t raise some of the emergency- and set-aside funding that government and the private sector have put in place.
So, the main challenges for current businesses are tax clearances and the fact that they’re sitting in a cash cliff. And so, we’re going to unpack some of the possible money and opportunities available to them.
And then on the businesses that are happily trading and are looking for more working capital and expansion finance, they are probably in a situation where a lot of them are struggling to make sure they’ve got their management accounts and other documentation rigour in place that lenders need. We can talk a little bit more about that in one or two of the future questions. But that really covers the main challenges.
You don’t have your cashflow forecast in place, you don’t have tax clearances, your management and financial statements. You haven’t got contracts or potential [contracts] that you can show funders how you’ll be able to pay the money back; and possibly you have debtors that haven’t paid you, but you don’t know how you are going to get that money because they are also sitting in the same position.
Types of funding
MELITTA NGALONKULU: Darlene, there are six types of funding options available for startups. Please touch on them, so we understand what’s needed to access various financing [types].
DARLENE MENZIES: Sure. I’m going to go into the specifics around funding that’s been available from government and the private sector around Covid-19 funding specifically, but just generally, the six areas that startups would typically look to, or six types of funders they would look to for money before they start a business, or when they’ve already started and are in the initial seed stage, and the early stage.
Family and friends
By far the biggest lending group or the funding group in this category is family and friends. I know that most people don’t like to hear that, but the reality is that [those are] people who know you, people who understand your experiences, your skills, your hard work, where you’ve come from, what it is that you are wanting to do. I think of youth that have maybe at high school … met with their friends’ parents, who are high net worth individuals, or people who at least have jobs and are now looking to start a business.
Those are the people who, if you go to them, know you, know that you’ve got a good character, you’re a hard worker, you’re astute, you were always the one … that they wanted their kids to play with because you were a good example. That’s the easiest place, really, to find that initial startup funding outside of your own money, to start a business. Even as we get older, it’s the networks that we develop. It’s not easy to go and ask for the money … but I’m saying that’s the place that you probably are most likely to secure funding.
More than 80% of startups start by putting their own money in, or money that has come from friends or family or people in their network.
The next category is crowdfunding. …Let’s say you’re looking for R1 000, R100 000 or R1 million, whatever your quantity is – instead of going to one person and asking for that whole amount, crowdfunding is where you actually get that money from a multitude of people. That can be done in two ways. It can even be done informally, where you go to friends and family and you ask each of them for a small amount. That’s informal crowdfunding. More formal crowdfunding is where it’s actual crowdfunding platforms available, where you can go and put what your particular business is and what you’re looking to do, and people then come in and … see whether that’s something that they want to look at….
The next one is government funding…. But government, outside of family and friends, is one of the next easiest places to be able to secure funding to start a business. Many listeners might think they’ve tried that, and it’s been difficult. I’m not saying it’s easy. I’m saying it’s one of the places that’s next easiest to go to. Startup funding is not easy to get hold of. People are very reticent to get behind somebody that hasn’t got a track record, for instance. Or, in many cases, you’ve got business owners who have failed previously and have liquidated and are starting again.
In other parts of the world that’s seen as a badge of experience. I liquidated three times before I became successful. In this country that’s not always seen in a good light. So, government funding then becomes a bit easier because some of their requirements are not as stringent.
Enterprise development programmes
The next piece, where some money is often found is enterprise development programmes, competitions and incubators. So, there’s a whole genre of support available to small business. I think about my first business product that we developed, SMEasy: the first money that we got in was [from] a R50 000 competition that we won some years ago. That’s how we built out of there. So those are the kinds of things to look out for.
…Angels are people whom you don’t necessarily know, but they are high net worth individuals, people who have made a lot of money and now want to look for ideas that they could get behind – either just to support people because they want to give back, or whom they want to make a lot of money out of in the future. The angels are one category.
Venture capital funds
And then venture capital companies are another. That’s normally reserved for people who have a new product for a big market that in future is going to make a lot of money, but at the moment don’t have the money to start building the business, and you look to a venture capital company that is in your industry. So, it’s financial technology, or it’s generally in the digital or technology type of environment, InsurTech and other types of technology.
So, it’s friends and family, crowdfunding, government funding, incubators, enterprise development programmes and competitions. The fifth one is angels, and then the last one is venture capital companies.
…if you go onto Finfind and go to the top section which says, ‘funding info’, you’ll pick up all of the different opportunities available around each of these.
Preparing for finance applications
MELITTA NGALONKULU: Apart from family and friends funding, what would you say are the important things that financiers tend to look at before financing a business, and how can small business owners be better prepared?
DARLENE MENZIES: That’s a really good question. …you will [often] find a business that matches for funding. So, we find that a certain funder in the market would fund that particular business. A black woman-owned business in Gauteng, in construction, [is] turning over R900 000; they’re looking for R50 000 working capital, and have all of the matching criteria that that particular funder is looking for. Most funders are looking for a particular type of business to fund.
So, then we say to them, right, this funder was able to help you. Can you please provide us with your budget and your cashflow forecast, so they can see where you’re going in the future, where your money’s coming from? Can you show us your income statement and your balance sheet? Show us what has happened in your business up to now. Those are called your financial statements. Please can you show us your contracts that have been signed? Can you show us your CIPC (Companies and Intellectual Property Commission) docs, all of your directors’ IDs that have these been stamped as originals? Can you please give us your proof of address, your bank statements for the business? They’ll need a statement of assets and liabilities, with a document from each owner to show that, as the owner of the business, this is what you own in your own right – I own a house, own a car, whatever it might be. There are certain documents that a lender needs.
The reason they need those documents is to look into your business and to see, number one, have you got a good business? Are they part of those documents? When they start to open your business plan is when they start to see if you are a viable business. Is this some business that we can back? Although they might be the right kind of business, black woman-owned business, construction – they tick all those boxes, does this business have the viability to go forward? Does it have a track record to show where it’s come from, and does it have all of the certifications and the necessary company documentation needed? Most times we are never able to get that immediately from any business. They might give us some businesses that at best will give us 80% of that documentation. Some businesses will literally only be able to give us 40%.
And so, I say to every business owner out there: At this time, what you need to be doing is get a folder together, preferably in cloud storage, so that if something happens to your laptop you don’t lose it. Create a folder, we call it the data room, and in there put sub-folders, CIPC docs, director IDs, bank statements, proof of address, management accounts, customer contracts, cashflow forecast, tax clearances.
Where you have a gap, work on making sure that you can get the right documents, the most up-to-date documents into that folder, because that’s a little bit like a woman who’s nine months pregnant and she’s about to go into labour, and then, all of a sudden, one starts asking questions about what breathing she is supposed to do, and how that’s all going to work. You know, it’s too late then; you’re in the labour ward and it’s all happening. It’s a bit like that with funding. You’ve got to prepare yourself for funding. You’ve got to have everything on your side ready, so that when the funder wants to investigate your business, you can actually offer that information.
…I’ll just use this last example. If you’re a business owner and you’re looking for funding, and you’re getting frustrated because funders won’t give you money, and they are asking you for all of these things, [think of it like this]: in your home [for example], your child has just finished school and they’re going to an interview and they are moaning at you because the people that they going to, to do the interview with, want their CV, and you say, ‘Look, of course, they want your CV. They want to see where you’ve come from, where you are now, and where you are going, what your aspirations are. That’s what’s in a CV.’ Well, the CV of a business is their financial statement. The income statement shows you where you’ve come from, what’s been happening in the business. The balance sheet shows you right now, a snapshot of what the business looks like – assets, liabilities, where you are. And the cashflow forecast shows you this is the income that you’re expecting, these are the expenses, these are who you have to pay, this is how the money’s coming in.
And so, for you to go to a funder without your financial statements is the same as your son or daughter going to an interview without a CV. The likelihood of them getting the job is very low, and it’s the same with us going to a funder.
…We can look and say, get our own houses in order as businesses, make sure we’ve got what the funder needs so that, when the time comes, we are ready – because, when you hit the cash cliff, it’s too late to try and start arranging funding. You need to see that in three months’ time I’m going to have a problem, I’m not going to have enough money – and you need to be approaching your bank and the lenders now.
MELITTA NGALONKULU: Lastly, a lot of businesses have spoken about the challenges in accessing finance, especially in the government sector. Much of the private funding announced to assist SMEs amid lockdown depleted fast. What would you advise these businesses to do?
DARLENE MENZIES: That’s another great question. Melitta, I would say this. First of all, we mustn’t sort of write off in one sense that private-sector funding has dried up, and government’s bad. That is generally, at different points along lockdown, true, but actually at the moment there are 15 private-sector different funds available to small business and 20 government funds.
And on the private-sector side, probably the easiest place to get money at the moment, whether government or private sector, is that government’s put R200 billion aside as loan guarantees for the banks to lend to their small-business customers. In other words, if you bank with a certain bank and you want to approach them for a loan, if the bank gives you that money, some of that money is being guaranteed and assisted through government to them. So, it’s easier for them to lend. Your bank knows you; they know your history.
So the easiest place to go right now is to your own bank and apply for the funding that has come – it’s called the loan-backed guarantee fund [loan guarantee scheme] that comes through government, but it’s being done through your bank.
Some of the others offered by the banks at the moment include Ubank, which is offering a township and rural economy fund. There’s also a Bridge Taxi Finance fund….They break [things] down. They say, this is how much you can borrow, this is what they want from you – minimums, maximums, requirements.
On the government side, outside of some of the funding from the Department for Small Business Development, there are also very sector-specific funds. There is the automotive aftermarket support team, the Agriculture Disaster Support Fund for Smallholders and Communal Farmers. There are small-scale bakeries and confectionery, small scale micro clothing and textiles for spaza shops, and general dealer support. There is a Tourism Relief Fund. There’s a Youth Micro-Enterprise Relief Fund. Those are more specific funds outside of the unemployment relief scheme and all of the Sars tax incentives that have been put in place. The IDC have a number. The NEF have a number. And then of course, SEFA are the ones that are backing what the Department of Small Business are doing with their funds.
But each one of these funds has very, very specific criteria. And it’s difficult, in a shorter interview, to go through each of those. So, I would encourage you to go to the Finfind website, and on there there’s a big button that says Covid-19. And, if you press it, it asks you a couple of questions, and then it takes you into a site that gives you all 20 of the government funds, all 15 of the private-sector funds. And if you click on the link, it’ll go in and it’ll for instance, say, “This fund has a turnover maximum” like the one from the banks with the government is R300 million.
So, if you turn over less than R300 million, you can get funding from there. The type of funding is a loan, and you get it over three months. A qualifying business gets a loan for up to three months for certain operational costs. The interest rate is not bad. It’s actually quite good. It’s set by government. The loan has a payment holiday for six months, so you get the money over three months, but you only have to pay it off after six months’ holiday. And there are a couple of [things]. The repayments are for a period of five years. So, the money is stretched over a long period.
Advice to SMEs
DARLENE MENZIES: My encouragement to small businesses is: don’t think on a certain day, when you’ve looked at funding at this time, you’ve seen that there wasn’t something for you.
There are new schemes, incentives, funding plans coming out from government and the private sector all the time, as we go deeper and deeper into the Covid-19 experience and the various forms of lockdown and how businesses are challenged. …you’d be surprised how much money is actually available.
But outside of specific funding, like for small confectioners or whatever, if that’s not used, my first recommendation is to go directly to your bank and to say to them you need some relief from any current loans that you have, or from your fees. They are negotiating on those things. And then [say] you want access to the loan-backed guarantee scheme that government has done with them. And you want to get that money over three months, and that you only have to start paying back in month seven – and you’ve got five years to pay it back. That would be my encouragement to small business.
That said, not everyone has a bank account and not every business does; not every business has a good relationship with their bank. There is a massive, massive gap in the market for businesses that are not being funded. Finfind is very aware of that, and we’re doing everything in our power that we can to lobby government, to lobby the private sector, to lobby donor funders, to say to them that new and better types of funding need to be put in place, because small businesses are champions of South Africa. Small businesses are the ones that do the majority of the employment, and we cannot afford to see small businesses retrenching staff or liquidating over this period. And sadly, we need to do everything we can to make sure that that’s not a reality.
When I speak to small business owners, I’m speaking as if I’m one of those in the choir singing the same song. Government and banks and other lenders need to be reducing some of their stringency around the criteria for lending. They need to be understanding small businesses, better using different types of scoring to support small businesses – because everyone needs to be doing their part to make sure that every business survives, and that we are able to go on after this lockdown period.
MELITTA NGALONKULU: That was Darlene Menzies, the founder and CEO of Finfind, addressing access to funding challenges.
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In the next episode of Small Business Conversations we talk to Dr Rethabile Melamu, general manager of the green economy at the Innovation Hub, on how to be future-fit in the changing business landscape.